The recent surge in corporate separations amongst industrials companies highlights a persistent theme from the last decade: an unwinding of the diversified business model.
From 2022 to 2023, M&A in the industrials sector faced several headwinds as corporates struggled with cost and wage inflation, material supply chain disruption, and tightening monetary policy. After a period of macroeconomic, geopolitical, and regulatory challenges, activity began to rebound in the back half of 2023. This year, we’ve observed an acceleration of activity within the sector as those pressures have begun to ease and CEO sentiment has become more positive.
With global industrial M&A volumes currently up over 50% YoY, separations in particular have come into focus. These break-ups can unlock shareholder value by affording the separated entity an appropriate trading multiple in public markets, ensuring management focus on the separated company’s performance, and allowing it to become the “master of its own destiny” in deploying capital – both organically and through M&A. The expansion of public equity investors’ AUM over time has also increased their demand for investment in more focused, separated entities.
“A breakup can be pursued from a position of strength,” says Matt McClure, global head of industrials, in the latest episode of The Insight. Often, companies reach a size and scale that can make it challenging to move the needle on growth, particularly when competing for capital within the conglomerate. McClure notes several key considerations for any company contemplating a separation: clearly understood strategic rationale to form the basis of an equity story for the separated company; potential one-time and recurring costs resulting from the separation; and the capital allocation and capital structure for both the parent company and for the separated entity.
Aside from the separation boom, several industrials sectors are also experiencing outsized growth as a result of the mega trends positively impacting their end markets.
Demand for electrical power and related equipment continues unabated – driven by the replacement of aging infrastructure, integration of renewables, the electrification of everything, and the emergence of power-hungry applications like data centers and AI. The “Industrial Metaverse” in particular, driven in large part by advances in AI, will continue an industry-wide evolution from consumer to enterprise solutions, resulting in materially increased power consumption.
In the aerospace and defense industry, McClure shares that the focus on modernizing military capabilities to address the needs of next gen warfare is forcing a shift from traditional domains like air, land and sea into less chartered territories like space and cyber -- driving demand from militaries for technological innovations across AI, space, cybersecurity, and unmanned systems.
As these and other trends persist, financing conditions ease, macro dynamics stabilize, “we’re optimistic that industrial companies will continue to be front-footed, deploying capital on M&A, and that private equity buyers will engage on the buyside with more conviction than they have done over the last couple of years,” says McClure.
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